Roth 401k Qualified Distributions

[Guest BXO]

In practice - what does 402A(d)(2)(B) below mean? Does the 5-year timetable begin (for all future contributions) when you put the first dollar into the Roth 401k account? Meaning, for example: If I contribute $1 to Roth 401k in 2006, any and all distributions made in 2011 or later are qualified (even though the bulk of contributions came post-2006)?

Is the answer the same for Roth IRAs?

Thanks.

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402A(d)(2)(B) DISTRIBUTIONS WITHIN NONEXCLUSION PERIOD. --A payment or distribution from a designated Roth account shall not be treated as a qualified distribution if such payment or distribution is made within the 5-taxable-year period beginning with the earlier of --

402A(d)(2)(B)(i) the first taxable year for which the individual made a designated Roth contribution to any designated Roth account established for such individual under the same applicable retirement plan, or

402A(d)(2)(B)(ii) if a rollover contribution was made to such designated Roth account from a designated Roth account previously established for such individual under another applicable retirement plan, the first taxable year for which the individual made a designated Roth contribution to such previously established account.

[Bird]

Yes, any 2006 contribution starts the 5-year clock as of 1/1/06.

any and all distributions made in 2011 or later are qualified

Yeah, that is, if Roth provisions are extended beyond their sunset date...

[ERISAnut]

That is actually a stategy many people are endorsing.

Actually defer $1 to a Roth 401(k) just to buy the option of already satisfying the 5 year requirement in the event you choose to contribute more in the future.

[jevd]

That is actually a stategy many people are endorsing.

Actually defer $1 to a Roth 401(k) just to buy the option of already satisfying the 5 year requirement in the event you choose to contribute more in the future.

But how are the TPA's responding to this? Tracking $1.00 until the employee decides if its worth making more deferrals. Also do the regulations permit the employer to impose minimum amounts for deferral?

[ERISAnut]

The recordkeeping software should actually be programmed to house the 'start date' for Roth 401(k) deferrals. (I forget the technical name for the date). This date will be used by the employee for any future Roth Deferrals, including plans of successor employers where this Roth account is rolled over.

It does require programming. But that is always the case when rule changes are made.

[Guest BXO]

I would say that tracking small balances of long-term employees should not be an issue for TPAs; it is not particularly onerous or even different from what occurs currently with pre-tax deferrals.

[Guest mjb]

This thread has all of the aspects of a solution in search of a problem because no one has considered whether the Roth is a better retirement vehicle than a tax deductible contribution. A roth is only advantageous if the employee will be in a higher tax bracket in retirement (which is higly unlikely since most employees have not saved enough for retirement). Few employers will adopt a Roth 401k because of the start up issues, communications and admin burdens that accompany Roth contributions which only have a life expectancy of less than 5 years.

[Guest BXO]

This thread answered my initial question quite well. Thanks for the responses.